Darden Real Estate Primer
-
Upload
roland-zhou -
Category
Documents
-
view
144 -
download
1
description
Transcript of Darden Real Estate Primer
-
5/19/2018 Darden Real Estate Primer
1/99
Darden Restaurants Inc.
A Primer on Dardens Real Estate
March 31, 2014
Includes Proprietary Analysis by Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
2/99
I. Summary
II. Overview of Dardens real estate
III. Valuation analysis
IV. Managements objections are not compelling
V. Bond covenants analysis
VI. Transaction scenarios
VII. Conclusion
Appendix
A. List of Darden Locations
TABLE OF CONTENTS
-
5/19/2018 Darden Real Estate Primer
3/99
I. Summary
-
5/19/2018 Darden Real Estate Primer
4/99
Extensive real estate portfolio
Darden Restaurants, Inc. (Darden, or the Company) has the largest real estate portfolio in the
casual dining industry, owning both the land and buildings on over 1,000 stores and the buildings o
another 850.
Our extensive research indicates that:
1. Dardens real estate is worth approximately $4 billion, and possibly far more.
2. Separating the real estate could create an additional $1-2 billion of shareholder value.
3. A real estate separation can be structured with minimal debt breakage costs and managements comments rega
debt breakage costs are highly misleading.
4. In a real estate separation, Darden shareholders can maintain their current dividend on a combined basis, whil
combined companies will have lower payout ratios.
5. Both Darden as an operating company and a Darden REIT can maintain investment grade ratings, if desired.
To supplement our own research, we have retained Green Street Advisors (Green Street), the leading independent
research firm specializing in real estate and REITs.
Based on this analysis, we believe that Dardens real estate is worth $4 billion or more, with the substantial majority
that value coming from Dardens fully-owned properties.
This is substantially more than the implied value that Darden receives by owning those properties from t
rent subsidy that it effectively receives.
Net of the value that the properties are worth inside of Darden, we believe that a real estate separation could c
$1-2 billion in shareholder value.
We believe that Dardens owned real estate is worth approximately $4 billion based on conservat
assumptions, and could be potentially worth far more.
Separating the real estate could create $1-2 billion in shareholder value.
-
5/19/2018 Darden Real Estate Primer
5/99
Realistic value creation potential
We demonstrate in detail how this value could be realized for the benefit of Darden shareholders.
We believe there are a number of feasible alternatives for the Company to create substantial value for shareholders
through real estate transactions.
We also believe that separating the real estate in a thoughtful manner would not result in meaningful friction c
In the pages that follow, we lay out:
The basis for our real estate valuation
Several transaction options that we believe could benefit shareholders
Our response to the arguments that management has raised against pursing a real estate transaction
We do not believe that there are significant obstacles to a value creating real estate transaction
The simple truth is that a dollar of real estate income, if owned by a real estate investor, is wort
more than a dollar of restaurant operating income.
-
5/19/2018 Darden Real Estate Primer
6/99
Substantial value creation opportunity
The real estate is worth more separated from Darden.
Dardens properties are worth more separated from Darden than the rent subsidy is worth
inside of Darden.
Along with Green Street, we have looked at a variety of valuation scenarios, including:
A location-by-location analysis of appropriate rent and cap rates (the Base Case)
Supportable Rent
Precedent Transactions
A Public REIT multiple-based valuation
The basis for each of these valuation methodologies is described in detail in the pages that follow.
The pote
creation
calculate
value of
estate le
value tha
believe D
currently
recognizeffective
subsidy
Real Estate Value Creation Summary
Cap Rate-based Valuations
Base Supportable Precedent Public REIT
Case Rent Transactions Low High
Total Real Estate Value $3,878 $4,595 $4,265 $3,636 $4,617
Less: Value of Properties Inside Darden ($2,672) ($3,150) ($2,906) ($2,633) ($2,962)
Potential Value Creation $1,207 $1,445 $1,359 $1,002 $1,655
Real Estate Value Creation p er Share(1)
$9.19 $11.01 $10.35 $7.64 $12.61
Debt Breakage Costs (2) We believe it is possible to structure a scenario with minimal debt breakage
(1) Does not include substantial operational value creation opportunities. We will issue a separate presentation on these
opportunities prior to the Special Meeting
(2) See debt breakage analysis in Section V
-
5/19/2018 Darden Real Estate Primer
7/99
Numerous feasible structures
We believe that there are a number of highly attractive alternatives to realize value from Dardens
estate.
Darden can create significant value for shareholders through any of the alternatives above.
An outright sale of the properties, either in whole or in part
A spin-off of all of Dardens real estate or just the fully owned (Fee Simple) properties as a publicl
traded REIT
A tax-efficient sale or merger with another REIT
1
2
3
For each of these business alternatives, there are a variety of specific transaction structures that could be used.
We will demonstrate illustrative structures that will allow Darden to:
Maintain its current dividend while reducing the payout ratio of the operating company
Maintain the companys investment grade rating, as well an investment grade rating for the REIT, if desired
Minimize breakage costs
-
5/19/2018 Darden Real Estate Primer
8/99
II. Overview of Dardens real estate
-
5/19/2018 Darden Real Estate Primer
9/99
Overview of Dardens real estate
Darden owns significantly more real estate than its peers.
1,058 locations with fully owned land andbuildings (the Fee Simple properties).
857 locations where Darden owns a building on leased land (the Ground Leased properties).
275 locations are fully leased, representing just 13% of Dardens portfolio.
The majority of Dardens stores are either Fee Simple or Ground Leased.
Dardens peers have all decided that they are in the restaurant businesswhy doe
Darden insist it needs to be in the real estate business as well?
Source: Green Street Advisors
Fee Simple,
15.2%
Ground Leased,
10.9%
Fully Leased,
73.9%
Darden Peers
Source: Company filings.
Peer group includes BBRG, TXRH, RT, RRGB, EAT, and BWLD; BWLD leases the land and building for a
utilizes ground leases, but does not specify the numbe
leases.
-
5/19/2018 Darden Real Estate Primer
10/99
Overview of Dardens real estate geographies
Darden's geographic footprint extends to nearly every significant market in the United States and
Canada.
The overall portfolio is weighted toward the Southern and Eastern U.S., with significant concentrations in Texas and
Florida.
Geographic diversity across 8 brands.
Source: Green Street Advisors
Canada: 1%
West: 16%Midwest: 21%
East: 27%
South: 34%
Brand
Olive Garden TX (10%) FL (9%) C
Red Lobster FL (9%) TX (8%) C
Longhorn Steakhouse GA (13%) FL (12%) P
Capital Grille FL (17%) TX (9%) N
Bahama Breeze FL (35%) NJ (14%) N
Yard House CA (39%) FL (12%) G
Eddie V's TX (50%) CA (16%) F
Seasons 52 FL (24%) CA (14%) T
Top Three States (% of St
-
5/19/2018 Darden Real Estate Primer
11/99
Darden Avg.
NNN REIT Avg.
Strip Ce nter REIT Avg.
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000
Avera
geHousehold
Income
Average Population
Population & Household Income 3-Mile Radius
(199,000,$67,000)
Overview of Dardens real estate markets
By studying income and population density within a three-mile radius of each property, Green Str
valuation estimates reflect trade area demographics.
On average, the Company's restaurants are located in markets with notably superior demographics relative to the ave
triple-net lease REIT.
Darden has strong locations.
Source: Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
12/99
Overview of Dardens real estate Fee Simple properties
The biggest portion of Dardens real estate portfolio is the Fee Simple properties.
Fee Simple is the highest ownership interest possible in real property.
For these properties, Darden fully owns the land and buildings.
The word "fee" is derived from fief, meaning a feudal landholding.
Red Lobster and Olive Garden are the biggest holders of Fee Simple properties.
Green Street valued the Fee Simple properties based on an estimated cap rate and rent per square foot.
456
416
138
21 21 6
Red Lobster
Olive Garden
LongHorn
SRG
Canada
Synergy
Source: Company filings
-
5/19/2018 Darden Real Estate Primer
13/99
Overview of Dardens real estate Ground Leased properties
Under a typical ground lease, the tenant (i.e., restaurant operator) pays to construct a building on
leased land, and pays rent to the land owner.
The rent paid by the tenant is lower than the full market rent paid on a fully leased property, since the tenant is only
leasing the land.
The difference between the rent paid by the tenant on the ground lease and the market rent for a fully leased
property is income that an owner of only the building could in theory earn by renting it out via a Second Lea
Green Street assumed a higher cap rate on the income from Second Leases than on Fee Simple properties.
Ground leases are typically structured to be long term (often longer than the depreciable life of the building) so that t
lessee, who is typically responsible for constructing and maintaining a building on the site, can recoup its investment
Ground leases are typically structured to have a lengthy initial lease term, followed by multiple lease extensio
options with fixed rental rate increases.
The land owner is typically not responsible for (1) property taxes, (2) utility expenses, or (3) capital expenditu
Source: Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
14/99
0
500
1000
1500
2000
2500
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Numb
erofLocations
Ground Leases: Remaining Term Analysis
Red Lobster Olive Garden Bahama Breeze Longhorn Steakhouse
Longhorn Steakhouse: Straight line average from2007 back to 1981 when Longhorn Steakhouse was
founded
Red Lobster: Straight lineaverage from 1985 back to
1968 when Red Lobster wasfounded
Overview of Dardens real estate Ground Leased properties
(contd)The term remaining on Darden's Ground Leased properties is a critical input in determining the
potential embedded value of a Second Lease position.
Darden's March 3, 2014 investor presentation states that the majority of its ground leases expire in less than 15 years
While the Company offered no information on extension options, it is likely that Darden can control its leases
longer period of time than 15 years (through options to extend the lease or options to purchase the underlying
Assuming the average Ground Lease has two or three 5-year options remaining, Green Street estimates that th
Company can control these sites for 25-30 years on average.
Source: Green Street Advisors
We believe Green Streets ground lease assumptions are conservative, but it is worth
noting that even if the average length of time that Darden can control these sites is
substantially shorter, significant value could still be created through a transaction
for the Fee Simple properties alone.
-
5/19/2018 Darden Real Estate Primer
15/99
III. Valuation Analysis
-
5/19/2018 Darden Real Estate Primer
16/99
Valuation analysis: Base Casemethodology
Green Street used a thorough, independent methodology to value the real estate.
Using publicly available information, Green Street obtained a list of Darden restaurants (as shown in Appendix A).
Brand designation, address, and other information were captured for each location.
Store count, square footage, and ownership data were updated to reflect Darden's March 3, 2014 investor
presentation.
MSA (metropolitan statistical area) and demographic data were layered onto the locational data to provide a platformwhich relative valuation adjustments could be made.
A large sample of triple net lease transaction data were assembled and refined to extract a set of casual dining salescomparables for both Fee Simple and Ground Leased assets.
From this subset of information, preliminary conclusions regarding average building and ground lease ratecharacteristics were drawn.
Green Street contacted market participants to validate and refine valuation assumptions.
Upon finalizing baseline rent, income growth, cap rate, and other assumptions, Green Street utilized the above mentigeographic data to derive property level valuation inputs, which were rolled up to estimate total real estate value forDarden's "casual dining" brands.
Darden's percentage of owned stores was applied to the estimated total real estate value to estimate the value oDarden's ownership.
To value Ground Leased real estate, Green Street estimated a ground lease rate for each asset and subtracted that fromestimated market rent to derive estimated net operating income ("NOI").
These values were rolled up to estimate the value of Darden's ground lease position.
Green Streets methodology is transparent and market-focused.
-
5/19/2018 Darden Real Estate Primer
17/99
Valuation analysis: Base Caselease and cap rates
Using comparable transactions and Green Street's proprietary retail lease and cap rate databases,
localized valuation inputs were developed.
For the Fee Simple properties, cap rate estimates range from mid-5% to low-8%. Lease rate estimates range from
approximately $15 to $42 per square foot per year.
Green Street assumed that the breakdown of Darden's owned and Ground Leased assets are in markets that are consi
with the Company's overall geographic exposure.
Values per square foot in the lowest valued region, the Midwest, are roughly half the value of the highest value regio
West.
Green Street valued stores in each market using the appropriate metrics.
Source: Green Street Advisors
CanadaEst. Lease Rate: $29.99Est. Cap Rate: 7.1%
Est. % of Value: 2%
Lease and Cap Rate Summary
WestMidwest
East
South
Est. Le ase Rate: $34.42Est. Ca p Rate: 6.6%Est. % of Value: 21% Est. Lease Rate: $26.20
Est. Cap Rate: 7.3%Est. % of Value : 32%
Est. Lease Rate: $29.27Est. Cap Rate: 6.9%Est. % of Value: 31%
Est. Le ase Rate: $19.95Est. Ca p Rate: 7.7%Est. % of Value: 15%
$520
$425
$381
$361
$259
West
East
Canada
South
Midwest
Value PSF Summary
-
5/19/2018 Darden Real Estate Primer
18/99
Valuation analysis: Base Casekey assumptions
Conservative assumptions support realistic valuation.
Green Street assumed that all 161 premium brand locations (Capital Grille, Eddie V's, Wildfish Seafood Grille, Yard
and Season's 52)1are fully leased or Ground Leased (if any of these are owned, the value would be higher).
All of the owned locations are assumed to be Red Lobster, Olive Garden, LongHorn, or Bahama Breeze, whic
believe is conservative, since those brands have lower AUVs than the premium brands and therefore lower pe
store values.
Green Street assumed that the breakdown of Darden's owned and Ground Leased assets are in markets that are consi
with the Company's overall geographic exposure.
Green Street used square footage information for each brand to inform their valuation.
Source: Green Street Advisors
Own vs. Lease Casual Dining Brands Total SF
Owned sites Red Lobster
Ground Leased Sites Olive Garden
Leased sites Bahama Breeze
Longhorn Steakhouse
40%
13%
%
48%
37
453
5.1MM
7.0MM
5
Avg
7
8
10.4MM
2.6MM
Stores
681
831
Olive Garden47%
RedLobster
34%
BahamaBreeze 2%
LonghornSteakhouse
17%
Total for both
owned and leased
locations
% of owned square
footage
(1) Although Bahama Breeze is part of SRG, for purposes of the real estate valuation Green Street refers to it as a casual
dining brand, since its locations are more similar to the other casual dining brands than to the premium brands
-
5/19/2018 Darden Real Estate Primer
19/99
Valuation analysis: Base Casekey assumptions (contd)
Conservative assumptions support realistic valuation.
For Fee Simple stores, value is based on a cap rate and rent per square foot.
For Ground Leased stores, rental income is based on a Second Lease position, which reflects the rent that would be
on a fully-owned store less the rent paid on the ground itself.
Source: Green Street Advisors
Owned Real Estate Ground Leased Real Estate
Average Lease Rate Average Market Rent
Average Cap Rate Average Market Cap Rate
Average Value PSF Average Ground Lease Rent
Est. Year-1 NOI ($mil) Average Ground Lease Cap Rate
Second Lease Position
Implied Cap Rate on Second Lease Position
Cap-ex as a % of NOI
Annualized NOI Growth
Average Remaining Lease Term
Discount Rate
8.8%
0.8%
1.9%
$27.10
7.1%
$383
$219
10.3%
27 Yrs
$29.59
7.1%
$18.95
6.0%
$27.10
$18.95
$1
7.1%
6.0%
8
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Owned Ground Lease Secon
Lease and Cap Rate S
Average Lease Rate
Average Cap Rate
Fee Simple Second Lease
Rent / sq. ft. $27.10 $10.65
Cap Rate 7.1% 8.8%
-
5/19/2018 Darden Real Estate Primer
20/99
Premium Brand Locations Total Square Footage of All Locations
Casual Dining Brand Locations Square Footage of Casual Dining Brands
Total Darden Locations % of Casual Dining Brand SF Owned
Owned Square Footage
Percentage of Locations Owned Average Market Lease Rate (NNN) PSF
Number of Stores Owned Average Cap Rate
% of Casual Dining Brand Locations Owned Total Year-1 NOI
Owned Real Estate Value ($MM)
Owned Value PSF
161
2,029
100%
51%
15.7
$3,095
$383
2,190
$219
51%
48%
1,058
16.9
$27.10
8.1
7.1%
7%
93%
Owned Real Estate Valuation SummaryLocations Owned
Valuation analysis: Base CaseFee Simple real estate
Applying the Company's ownership information to Green Street's valuation model implies a value
approximately $3.1 billion just for Darden's Fee Simple real estate, not including the value of Grou
Leased real estate.
Of the owned locations, 1,037 are Red Lobster, Olive Garden, and Longhorn.
Conservatively assumes all of the remaining 21 owned locations attributed to SRG are Bahama Breeze.
In a base case, the Fee Simple properties are worth approximately $3.1 billion.
Source: Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
21/99
1 Assumes 10% rent bumps every five years.
Source: Green Street Advisors .
7.1%
6.1%
8.8% 8.7%0.1%
OwnedCapRate
GroundLeased
CapRate
SecondLeaseCapRate
Cap-ex Year-1CashYield
Secondary Lease Cap Rate Analysis
&1.9% Long-
term NOIGrowth
10.3%Discount
Rate
Valuation analysis: Base CaseGround Leased real estate
Green Street used assumptions for the cap rate and growth rate of ground leases to derive a disco
rate for valuing the Second Lease position on a ground lease.
Owners are estimated to require a 7.1% cap rate to own both the land and the building. Given that Ground Lease cap
are 6.1%, the required cap rate on Second Leases must be sufficiently high so that when combined with a Ground Le
they blend to a 7.1% cap rate.
Given Green Street's owned asset and Ground Leased cap rates of 7.1% and 6.1%, respectively, a cap rate on seconda
leases of 8.8% was implied. Applying minimal cap-ex, an 8.7% year-1 yield was derived.
Assuming 1.9% NOI growth over time1, a discount rate of 10.3% on secondary lease cash flows was determined.
Green Streets valuation fully reflects the secondary ownership position of a ground lease hol
-
5/19/2018 Darden Real Estate Primer
22/99
Premium Brand Locations Total Square Footage of All Locations
Casual Dining Brand Locations % of SF Ground Leased Locations
Total Darden Locations Total Ground Leased SF
Average Market Lease Rate (NNN) PSF
Percentage of Locations Ground Leased Average Ground Lease Rate
Number of Stores Ground Leased Implied Secondary Lease Rate
% of Casual Dining Brand Locations Implied Cap Rate on Secondary Lease
Ground Leased Cap-ex as a % of NOI
% of Premium Brand Locations Annualized NOI Growth RateGround Leased Discount Rate
Year-1 NOI
Average Lease Term Remaining
Secondary Lease Value
25-30 Yrs
10.3%
40%
857
41%
19%
2,190
161
2,029
7%
93%
100%
16.9
$29.59
$783
$74
6.3
0.8%
1.9%
37%
$18.95
$10.65
8.8%
Summary of Secondary Lease ValueLocations Ground Leased
Valuation analysis: Base CaseGround Leased real estate
Applying the Company's ground lease information to Green Street's valuation model implies a val
of approximately $783 million for Darden's Ground Leased real estate.
While owned locations offer the benefit of a potentially infinite cash flow stream, buildings on ground leases revert b
to the landlord upon expiration of the lease. This is why ground leases tend to be very long-term and have relatively
contracted rental rate increases.
Ground leases are highly valuable as well, though valuing and monetizing ground leases does h
additional complications.
Source: Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
23/99
$3,095
$3,878$783
Est. Value of Owned Assets Est. Value of GroundLeased Assets
Total Real Estate Value
Darden Real Estate Value Summary
80%
20%
Est. Value of Owned Assets
Est. Value of Ground Leased Assets
Valuation analysis: Base CaseSummary
In a base case, Green Street values the Fee Simple properties at approximately $3.1 billion and the
Ground Leased properties at approximately $0.8 billon.
Green Streets base case valuation for the real estate is $3.9 billion.
Source: Green Street Advisors
-
5/19/2018 Darden Real Estate Primer
24/99
Valuation analysis: Supportable Rent
In order to validate the Base Case, we analyzed the expected rent coverage in the Base Case and th
maximum supportable rent.
Analysis shows Darden can support rent well in excess of what we have assumed.
According to Green Street, EBITDAR / rent coverage of 2.25x to 2.50x is often deemed adequate by net lease invest
This coverage range implies that the Darden operating company (OpCo) would have the ability to pay betw
$30 and $37 / sq. ft. based on FY 2015 consensus EBITDA.
If our margin improvement initiatives1are successful, this could raise the supportable-rent range to $35-45/sq
Current Lease Expense Rent Coverage - Before Cost Reductions
Operating Leases $197 2015E Consensus EBITDA $1,048
Capital Leases $6 Plus: Current Cash Rent $171
Total Lease Expense $203 EBITDAR $1,219
Less: Change in Deferred Rent ($32) Pro Forma Rent $464
Current Cash Rent Expense $171 EBITDAR / Rent 2.63x
Plus: Rent on Fee Simple Properties $219 Suppo rtable Rent
Plus: Rent on Ground Leased Properties $74 Coverage Ratio 2.50x 2.25x
Total Pro Forma Cash Rent $464 Supportable Rent $488 $542
Less: Current Cash Rent ($171) ($171)
Less: Ground Lease Rent ($74) ($74)
Supportable Fee Simple Rent $243 $297
Fee Simple Square Footage (000s) 8,079 8,079
Rent / sq. ft. $30.02 $33.37 $36.73
Rent Coverage - Pro Forma for Cost Reductions
2015E Consensus EBITDAR $1,219 $1,219 $1,219
Plus: Illustrative Cost Reductions $100 $200 $300
Pro Forma EBITDAR $1,319 $1,419 $1,519
Pro Forma Rent $464 $464 $464
EBITDAR / Rent 2.84x 3.06x 3.27x
Sup por table Rent @ 2.50x
Supportable Rent $528 $568 $608
Less: Current Cash Rent ($171) ($171) ($171)
Less: Ground Lease Rent ($74) ($74) ($74)
Supportable Fee Simple Rent $283 $323 $363
Fee Simple Square Footage (000s) 8,079 8,079 8,079
Rent / sq. ft. $34.97 $39.92 $44.87
It is important to note that these cost reductions areillustrativewe will publish our full operating plan
for Darden, which will include substantial cost
reductions, among other operational improvements,
prior to the Special Meeting
Generally
range
This com
to the Ba
Case of
and $27
More than
coverage
(1) Our margin improvement plan will be discussed in our presentation prior to the Special Meeting
Source: Green Street Advisors
Source: Bloomberg, Green Street, Starboard Value estimates
-
5/19/2018 Darden Real Estate Primer
25/99
Valuation analysis: Supportable Rent
A valuation based on supportable rent yields a substantial premium to the base case.
The supportable rent valuation yields a total real estate value of approximately $4.6 billion.
The valuation below uses the midpoint of the rent / sq. ft. range that we believe Darden can support before cost
reductions, per the prior slide, for the Fee Simple properties, and the base case valuation for the Ground Leased
properties.
It uses the cap rate from the base case.
Again, it is important to note that we believe that with cost reductions Darden could support rent substantially
excess of even the highest end of the rents we have assumed in any of our valuations; however, the maximum
supportable rent may be higher than market rent in some instances.
Base Case Supportable Rent Valuation
Rent / sq. ft. $27.10 Rent / sq. ft. $33.37
Fee Simple Square Footage (000s) 8,079 Fee Simple Square Footage (000s) 8,079
Total Rent $219 Total Rent $270
Cap Rate 7.1% Cap Rate 7.1%
Value $3,095 Value $3,812
Implied EBITDA Multiple 14.1x Implied EBITDA Multiple 14.1x
Plus: Ground Lease Value (base case)(1) $783 Plus: Ground Lease Value (base case)(1) $783
Implied EBITDA Multiple 10.6x Implied EBITDA Multiple 10.6x
Total Real Estate Value $3,878 Total Real Estate Value $4,595
(1) The rent coverage statistics used on the prior page assume the Base Case rent on ground leases, so the Base Case ground lease
valuation is used.
-
5/19/2018 Darden Real Estate Primer
26/99
Valuation analysis: Precedent Transactions
Green Street analyzed a set of precedent transactions for properties comparable to Dardens.
The average rent per square foot on precedent transactions was
approximately $30.
Source: Green Street Advisors
Posted On Property Name State Cap Rate Price Price PSF Rent PSF
12/9/13 Carrabbas Italian Grill AL 7.0% $1,335,715 $209 $14.60
12/7/13 Buf falo Wild Wings NM 7.5% $3,320,000 $414 $31.06
11/26/13 Buf falo Wild Wings CT 7.5% $4,216,000 $703 $52.70
11/20/13 Black Angus CA 6.5% $5,320,000 $517 $33.60
11/20/13 Black Angus CA 6.5% $5,240,000 $509 $33.07
11/20/13 Black Angus CA 6.3% $3,660,000 $358 $22.4111/20/13 Black Angus CA 6.3% $5,875,000 $576 $36.02
11/20/13 Black Angus CA 6.3% $3,190,000 $329 $20.57
11/19/13 Hooters MO 7.3% $1,931,034 $471 $34.18
11/15/13 Applebee's GA 6.7% $3,150,000 $576 $38.54
11/12/13 Hooters TX 7.0% $2,640,000 $432 $30.21
11/12/13 Hooters TX 7.0% $2,450,000 $337 $23.62
11/12/13 Hooters TX 7.0% $2,075,000 $292 $20.40
11/12/13 Hooters TX 7.0% $2,695,000 $588 $41.20
11/12/13 Hooters TX 7.0% $3,425,000 $614 $42.97
11/5/13 Johnny Carinos LA 9.5% $1,828,000 $280 $26.58
10/28/13 Buf falo Wild Wings CO 6.4% $3,100,000 $563 $36.15
10/7/13 Macaroni Grill MI 7.0% $2,365,000 $318 $22.25
9/2/13 Denny's AZ 6.0% $1,416,666 $414 $24.82
8/27/13 Applebee's GA 6.7% $3,150,000 $576 $38.54
8/23/13 Applebee's MI 6.9% $2,950,000 $660 $45.69
6/14/13 Red Lobster CA 5.1% $3,200,000 $513 $25.99
6/3/13 Denny's IN 7.3% $1,594,000 $245 $17.77
5/8/13 Denny's CO 6.3% $2,000,000 $465 $29.30
3/27/13 Carino's Italian Grill TX 6.8% $3,157,358 $512 $34.58
3/27/13 Carino's Italian Grill TX 6.8% $3,545,941 $574 $38.742/4/13 Buffalo Wild Wings ND 6.8% $4,444,500 $741 $50.00
1/31/13 Ruby Tuesday MI 6.5% $1,700,000 $266 $17.23
1/28/13 Romano's Macaroni Grill IL 7.5% $2,310,000 $273 $20.51
11/7/12 Golden Corral KY 8.4% $3,690,475 $338 $28.38
11/7/12 Golden Corral KY 8.4% $3,896,075 $363 $30.32
11/7/12 Golden Corral KY 8.4% $3,690,475 $344 $28.92
3/12/12 Denny's AZ 8.5% $976,658 $212 $18.05
3/12/12 Applebee's GA 7.5% $2,936,360 $582 $43.68
11/18/11 LongHorn Steakhouse GA 6.2% $1,500,000 $267 $16.61
All Restaurants 7.0% $441 $30.55
Average Middle 90% 5% 7.0% $438 $30.17
This compares to
the base case of
$27.10
This compares tothe base case of
7.1%
Although 1 store may not
be indicative, a Red
Lobster recently sold at a
5.1% cap rate
-
5/19/2018 Darden Real Estate Primer
27/99
Valuation analysis: Precedent Transactions
We looked at a valuation based on the precedent transactions.
The precedent transactions valuation yields a total real estate value of approximately $4.3 billion.
The valuation below uses the average rent / sq. ft. and cap rate for the middle 90% of transactions identified by Green
Street for the Fee Simple properties, and the base case valuation for the Ground Leased properties.
We believe the 7.0% cap rate used is highly conservative, given that all of the units Darden would be selling are comowned, rather than franchised.
According to Marcus & MillichapsFirst Half 2014 Net-Leased Outlook, Corporate-owned properties can ch
hands in the low-6 percent range, while franchisee-occupied restaurants will trade at first-year returns
approximately 150 basis points higher.
The precedent transactions used were a mix of both corporate-owned and franchised stores.
(1) The precedent transactions did not include enough data on Second Lease transactions to provide a meaningfully different
alternative than the base case, so the Base Case assumptions were used.
Base Case Supportable Rent Valuation Precedent Transactions Valuatio
Rent / sq. ft. $27.10 Rent / sq. ft. $33.37 Rent / sq. ft.
Fee Simple Square Footage (000s) 8,079 Fee Simple Square Footage (000s) 8,079 Fee Simple Square Footage (000s)
Total Rent $219 Total Rent $270 Total Rent
Cap Rate 7.1% Cap Rate 7.1% Cap Rate
Value $3,095 Value $3,812 Value
Implied EBITDA Multiple 14.1x Implied EBITDA Multiple 14.1x Implied EBITDA Multiple
Plus: Ground Lease Value (base case)(1) $783 Plus: Ground Lease Value (base case)(1) $783 Plus: Ground Lease Value (base case)(1)
Implied EBITDA Multiple 10.6x Implied EBITDA Multiple 10.6x Implied EBITDA Multiple
Total Real Estate Value $3,878 Total Real Estate Value $4,595 Total Real Estate Value
-
5/19/2018 Darden Real Estate Primer
28/99
Valuation analysis: Public REIT
We also looked at the trading multiples of the triple-net lease REIT peers identified by Green Stree
the closest peers to a potential Darden REIT.
Public REIT peers trade at significantly higher valuations than we have assumed in the Base C
It is important to note that REIT investors will also look at funds from operations (FFO) and dividend-based valuatio
Since those valuations depend on the exact capital structure chosen, we have valued the public REIT based on
EBITDA; in Section VI, when we discuss hypothetical capital structures, we will also show an illustrative FFO
LTM
Company FFO Yield EV / EBITDA
Agree Realty Corp. 7.3% 17.3x
American Realty Capital Properties, Inc. 7.7% n.a.(1)
Chambers Street Properties 8.7% 20.3x
EPR Properties 7.9% 14.8x
Getty Realty Corp. 6.9% 15.5x
Gladstone Commercial Corp. 7.2% 14.7x
Lexington Realty Trust 7.6% 14.8x
National Retail Properties, Inc. 6.0% 18.5x
Realty Income Corporation 6.2% 19.9x
Select Income REIT 8.5% 14.5x
Spirit Realty Capital, Inc. 7.7% 22.9x
W. P. Carey Inc. 5.9% 27.2x
Mean 7.3% 18.2x
Median 7.5% 17.3x
Source: Capital IQ, Stifel, Nicolaus & Company Research
(1) Excludes ARCP LTM multiple of 98.4x, adjusted for Cole Real Estate Investments merger
-
5/19/2018 Darden Real Estate Primer
29/99
Base Case Supportable Rent Valuation Precedent Transactions Valuation
Rent / sq. ft. $27.10 Rent / sq. ft. $33.37 Rent / sq. ft. $30
Fee Simple Square Footage (000s) 8,079 Fee Simple Square Footage (000s) 8,079 Fee Simple Square Footage (000s) 8,0
Total Rent $219 Total Rent $270 Total Rent $2
Cap Rate 7.1% Cap Rate 7.1% Cap Rate 7.0
Value $3,095 Value $3,812 Value $3,4
Implied EBITDA Multiple 14.1x Implied EBITDA Multiple 14.1x Implied EBITDA Multiple 14.
Plus: Ground Lease Value (base case)(1) $783 Plus: Ground Lease Value (base case)(1) $783 Plus: Ground Lease Value (base case)(1) $7
Implied EBITDA Multiple 10.6x Implied EBITDA Multiple 10.6x Implied EBITDA Multiple 10.
Total Real Estate Value $3,878 Total Real Estate Value $4,595 Total Real Estate Value $4,2
Public REIT Valuation
Low High
Rental Income
Fee Simple(2) $219 $244
Ground Leased $70 $80
Total Rental Income $289 $324
Less: SG&A(3) ($23) ($26)
EBITDA $266 $298
EBITDA Multiple 13.7x 15.5x
Enterprise Value $3,636 $4,617
Valuation analysis: Public REIT
A valuation of a public REIT spin-off based on the average trading comparables yields a premium
the Base Case.
The Public REIT valuation yields a total real estate value of approximately $3.6-4.6 billion.
The valuation uses a conservative multiple range that is a discount of approximately 15-25% to the LTM multiples o
triple-net REIT peer group, to account for possible concerns about tenant concentration.
(1) Base case used for the three cap rate-based valuations
(2) Low based on Base Case and High based on Precedent Transactions. If Supportable Rent were used, the High would increase to approx. $5bn
(3) Estimated as 8% of Rental Income, on par with similarly-sized REITs that have a large retail mix and an active M&A focus, such as NNN, O, and
SRC; note that Green Street's NOI number is net of all property expenses, so there should be no additional operating expenses aside from SG&A
Low
Median Peer Multiple 18.2xAssumed Discount 25.0%
Public REIT Valuation Multiple 13.7x
In the event that only the fee-simple real estate is spun off, we
believe the REIT would trade at a slightly higher multiple than
we have assumed in the full REIT valuation, but obviously with
fewer properties.
-
5/19/2018 Darden Real Estate Primer
30/99
Valuation analysis: summary
Various methodologies support real estate value.
Our valuation methodologies demonstrate a value of $3.6-4.6 billion for Dardens real estat
Along with Green Street, we have looked at a variety of valuation scenarios, including a location-by-location analysi
appropriate rent and cap rates (Base Case), Supportable Rent, Precedent Transactions, and Public REIT analyses.
Based on these analyses, we believe the real estate is worth approximately $4 billion, and possibly far more.
Real Estate Valuation
Cap Rate-based Valuations
Base Supportable Precedent
Case Rent Transactions Public REIT
Rent / sq. ft. $27.10 $33.37 $30.17
Fee Simple Square Footage (000s) 8,079 8,079 8,079
Total Rent $219 $270 $244 Low High
Cap Rate 7.1% 7.1% 7.0% Rental Income
Value $3,095 $3,812 $3,482 Fee Simple $219 $244
Implied EBITDA Multiple 14.1x 14.1x 14.3x Ground Leased $70 $80
Total Rental Income $289 $324
Plus: Ground Lease Value (base case) $783 $783 $783 Less: SG&A(1) ($23) ($26)
Implied EBITDA Multiple 10.6x 10.6x 10.6x EBITDA $266 $298
EBITDA Multiple 13.7x 15.5x
Total Real Estate Value $3,878 $4,595 $4,265 Enterprise Value $3,636 $4,617
Source: Green Street Advisors, Starboard Value Estimates
(1) Estimated as 8% of Rental Income, on par with similarly-sized REITs that have a large retail mix and an active M&A focus, such as NNN, O, and SRC;
note that Green Street's NOI number is net of all property expenses, so there should be no additional operating expenses aside from SG&A
-
5/19/2018 Darden Real Estate Primer
31/99
Valuation analysis: sensitivity
We sensitized our valuation over a wide range of assumptions.
Even at the lowest end of the range, the real estate has substantial value.
Valuation Sensitivity
Rent / sq. ft.
$26.00 $27.00 $28.00 $29.00 $30.00 $31.00 $32.007.5% $2,801 $2,908 $3,016 $3,124 $3,232 $3,339 $3,447
Fee 7.3% $2,877 $2,988 $3,099 $3,209 $3,320 $3,431 $3,541
Simple 7.1% $2,959 $3,072 $3,186 $3,300 $3,414 $3,527 $3,641
Properties 6.9% $3,044 $3,161 $3,278 $3,396 $3,513 $3,630 $3,747
6.7% $3,135 $3,256 $3,376 $3,497 $3,617 $3,738 $3,859
Plus: Ground Lease Value $783 $783 $783 $783 $783 $783 $783
Rent / sq. ft.
$26.00 $27.00 $28.00 $29.00 $30.00 $31.00 $32.00
7.5% $3,584 $3,691 $3,799 $3,907 $4,015 $4,122 $4,230
Cap Rate 7.3% $3,660 $3,771 $3,882 $3,993 $4,103 $4,214 $4,325
Based 7.1% $3,742 $3,855 $3,969 $4,083 $4,197 $4,310 $4,424
Valuation 6.9% $3,827 $3,944 $4,061 $4,179 $4,296 $4,413 $4,530
6.7% $3,918 $4,039 $4,159 $4,280 $4,401 $4,521 $4,642
EBITDA
$250 $260 $270 $280 $290 $300 $310
12.0x $3,000 $3,120 $3,240 $3,360 $3,480 $3,600 $3,720
Publicly 13.0x $3,250 $3,380 $3,510 $3,640 $3,770 $3,900 $4,030
Traded 14.0x $3,500 $3,640 $3,780 $3,920 $4,060 $4,200 $4,340
REIT 15.0x $3,750 $3,900 $4,050 $4,200 $4,350 $4,500 $4,650
16.0x $4,000 $4,160 $4,320 $4,480 $4,640 $4,800 $4,960
CapRate
CapRate
EBITDAMult.
The tables below show how our valuation would vary based on different assumptions.
For the per cap rate-basedvaluations (Base Case,
Supportable Rent, Precedent
Transactions), we vary the rent /
sq. ft. and cap rate on the Fee
Simple properties
We then add the base case value
for the Ground Leased properties
to get the total real estate value
for each set of assumptions
For the Publicly Traded REIT
valuation, we vary the EBITDA
and EBITDA multiple
-
5/19/2018 Darden Real Estate Primer
32/99
Valuation analysis: value creation
Under a variety of valuation methodologies, the real estate is worth more separated from Darden.
There is a substantial value creation opportunity, because the rent on Dardens properties is
worth substantially more to a real estate owner than inside of Darden.
When looking at a real estate separation, it is not only the absolute value of the real estate that is important, but the
difference between the real estate value and what the effective rent subsidy is worth inside the Company.
The potential value creation above is before any tax leakage or debt breakage costs.
In Section VI, we discuss several transaction scenarios that we believe could effectuate the above value; in ethose scenarios, we account for estimated tax leakage, if applicable.
As discussed in detail in Sections V and VI, we believe that each of our transaction scenarios could be comp
with minimal-to-no debt breakage costs, and we suggest structuring options for each transaction scenario tha
minimize breakage costs.
In the most likely scenarios, we believe debt breakage costs would be in the $0-20 million range, net of taxe
do not believe there are any realistic scenarios where debt breakage would prevent a real estate transaction f
creating value, as we discuss in Section V.
Real Estate Value Creation
Cap Rate-based Valuations
Base Supportable Precedent Public REITCase Rent Transactions Low High
Total Real Estate Value $3,878 $4,595 $4,265 $3,636 $4,617
Additional Rent Paid by Darden $293 $344 $318 $289 $324
Less: Reduced Real Estate costs ($10) ($10) ($10) ($10) ($10)
Darden EBITDA Reduction $283 $334 $308 $279 $314
Darden EBITDA Multiple 9.4x 9.4x 9.4x 9.4x 9.4x
Lower Value on OpCo $2,672 $3,150 $2,906 $2,633 $2,962
Potential Value Creation $1,207 $1,445 $1,359 $1,002 $1,655
Value Creation per Darden Share $9.19 $11.01 $10.35 $7.64 $12.61
Gross value from
valuation case
Value of rent su
Darden
The difference be
gross real estate v
the value of the
subsidy is the po
value creation
Before
cost
reductions
-
5/19/2018 Darden Real Estate Primer
33/99
Valuation analysis: value creation sensitivity
We looked at the potential for value creation under a variety of scenarios.
If so much value could be created through a real estate separation, why is management fighting it
so hard...
Valuation Creation Sensitivity(1)
Rent / sq. ft.
$26.00 $27.00 $28.00 $29.00 $30.00 $31.
7.5% $1,695 $1,727 $1,758 $1,789 $1,821 $1,8
Cap Rate 7.3% $1,772 $1,806 $1,841 $1,875 $1,909 $1,9
Based 7.1% $1,853 $1,890 $1,928 $1,965 $2,003 $2,0
Valuation 6.9% $1,939 $1,979 $2,020 $2,061 $2,102 $2,1
6.7% $2,030 $2,074 $2,118 $2,162 $2,207 $2,2
EBITDA
$250 $260 $270 $280 $290 $312.0x $734 $760 $785 $811 $837 $8
Publicly 13.0x $984 $1,020 $1,055 $1,091 $1,127 $1,1
Traded 14.0x $1,234 $1,280 $1,325 $1,371 $1,417 $1,4
REIT 15.0x $1,484 $1,540 $1,595 $1,651 $1,707 $1,7
16.0x $1,734 $1,800 $1,865 $1,931 $1,997 $2,0
(1) Value Creation equals value from the prior slide less the value of that same income inside
at 9.4x EBITDA, and is therefore net of the "rent subsidy" that Darden currently enjoys
CapRate
EBITDAMult.
Management has argued that a real estate transaction does not make sense because a Darden REIT may not achieve
same valuation multiple as other publicly traded triple-net REITs.
We believe our analysis, based on extensive research by Green Streetand other real estate experts, demon
that a real estate separation would create meaningful value. As the sensitivity table shows, even at a significant discount to our already-discounted valuation, a real
separation still creates meaningful valuefor Darden shareholders.
Potentially trading at a discount to peers is not an
argument against separating the real estate.
The question is where the REIT would trade
relative to Dardens current multiple or
New Red Lobsters expected multiple.
Management is arguing the wrong point.
Although management has refused to share the
assumptions used in their own real estate analysis,
we believe it is clear that over any range of
reasonable assumptions a real estate separation
creates substantial value.
-
5/19/2018 Darden Real Estate Primer
34/99
Managements incentives with regard to the real estate appear to
conflict with shareholdersManagement gets a perceivedbenefit from owning real estate.
is management addicted to the subsidy of free rent?
Since Darden owns substantially more real estate than peers, Dardens reported operating expenses are meaningful
understated compared to peers, and Dardens margins are therefore overstated.
Excluding the rent subsidy that Darden currently gets from owning its properties, Dardens operating performanc
substantially below peers.
We believe fully-leased EBITDA is the best metric by which to judge Dardens operating performance, as op
to the earnings generated through site selection and capital investment in real estate.
To calculate fully-leased EBITDA, we adjusted Darden and each of its peers EBITDA assuming that they p
market rent on every location that is owned or Ground Leased.
Source: Company filings, Capital IQ, company presentations and Green Street Advisors.
Note: Assumes $27.10/rent per square foot for owned properties and $10.65/rent per square foot for ground leased properties.
If adjusted for franchised stores, assuming a 40% margin on franchised revenue, the median EBITDA margin equals 10.3% and the average equals 9.9%.
* Denotes at leased 20% franchised properties.
(1) BWLD leases the land and building for all sites or utilizes ground leases, but does not specify the number of ground leases: no adjust ment has been made.
(2) Assumes $65.00/rent per sq. for single owned property.
14.9% 14.8%
12.7% 12.4%
10.3% 10.3% 9.9%
8.6%
7.4%
(0.7%)(2%)
0%
2%
4%
6%
8%
10%
12%
14%
16%
BWLD DFRG CAKE EAT TXRH BBRG RRGB BLMN DRI
RT
Estimated LTM EBITDA margins on a fully-leased basis
(1) (2) * ***
Median: 10.3%
Despite high AUVs and industry leading revenue, Dardens
operating performance is significantly worse than peers
$2.8 $7.3 $3.2$10.4 $4.2 $4.1 $2.8 $3.2 $4.12013 AUVs:
($ in millions)
$1.7
$1,267 $272 $2,861$1,878 $1,423 $411 $1,107 $4,129 $8,740 $1,189LTM Revenue:
$3.2
$1,267
Median
-
5/19/2018 Darden Real Estate Primer
35/99
The fully-leased EBITDA analysis reveals a 300 basis point margin gapbetween Darden and peers.
There is no structural reason for this underperformance.
This is despite higher AUVs and greater scale than peers, both of which should enable Darden to achieve higthan average margins.
Thisis the opportunity that first attracted us to Darden, and we will address it in detail prior to the Special Meet
We believe that this is the opportunity that Darden hired Alvarez & Marsal to analyze.
We have been working on a plan to address this opportunity for more than a year.
We have spoken to dozens of leading restaurant executives who have guided peers through similar turn
opportunities and who have identified areas for improvement at Darden.
We have retained a highly qualified group of advisors, with expertise directly relevant to Dardens curr
situation, to assist us in refining our operating plan.
We have retained a leading operationally-focused consulting firm to identify additional areas forimprovement.
If Darden can address this opportunity, it can realize value for its real estateand still maintain margins similar
current reported margin.
The biggest opportunity is an operational turnaround
Stripping out Dardens real estate subsidy reveals another large opportunityan operational
turnaround.
If Darden can execute on the operational opportunities that we will discuss prior to the Special
Meeting, the potential for value creation is even greater than the value creation available through
real estate separation alone.
Importantly, we believe these operational changes should be made in addition to a real estate
transaction, not instead of one.
-
5/19/2018 Darden Real Estate Primer
36/99
IV. Managements objections are not compelling
-
5/19/2018 Darden Real Estate Primer
37/99
Likelihood of needing to close a large number of locations is low
Cost of potentially paying out lease on a small number of locati
some indefinite point in the future is immaterial compared to va
created through a separation, and would in fact merely represen
return of a small portion of the value that shareholders had alrea
received for those properties
Locations that would lose a substantial amount of money if they
to pay market rent should be closed now, and the properties sho
sold outright
Questionable locations could be held back or structured as short
leases with an option, giving the location time to attempt a
turnaround before a decision must be made
Managements objections are not compelling
Although management has objected to spinning off or selling real estate, we believe their argument
are misguided, and that Darden is in fact an ideal candidate to create value through a real estate
transaction.
The standard arguments against separating the real estate are not compelling.
Loss of
control
Potential
lease
liabilities
Significant loss of control
Darden and the landlord may
have diverging objectives
Darden can approve the structure of the leases, since they will b
novo
Triple-net leases afford flexibility in regard to remodels, rebrand
etc.
Peers have no trouble with control of leased locations (peers l
the vast majority of locations)
Managements Statement Our view
Inhibits ability to easily close
or relocate underperforming
units
If a significant numbers of locations fall into this
bucket, that could actually represent upside to our
valuation, as it would imply that the rest of the
locations are more profitable than we are assuming
-
5/19/2018 Darden Real Estate Primer
38/99
Significant debt breakage costs are unlikely, as shown by independen
and demonstrated in section V
Ratings downgrade only likely if transaction is poorly structured with
OpCo assuming most/all of the debt
In the case of a REIT spin-off, more after-tax cash flow and
friendly structure mean more debt capacity and lower rates
In the case of a sale, cash could be used to pay down debt if
management desired
Peers lease all or most of their real estate, yet can issue debt at simila
While that may be a nice sound-bite, it is simply not true. Managem
shareholders money to acquire properties, and leases are not a debt s
they are a debt and equitysubstituteit is not about increasing lever
about putting the assets in the hands of those who value them the mo
Managements objections are not compelling (contd)
None of managements concerns show why a real estate separation is not in the best interests of
shareholders.
Lower
margins
Debt
related
costs
Rent burden hurts margins and
inhibits flexibility
Diminished capacity to returncapital to shareholders
No longer insulated from rising
rent environment
We view revealing Dardens true operational inefficiencies as an opp
to begin a turnaround (the first step is admitting there is a problem)
Pro forma for our cost savings plan, Darden should be able to achieve
similar to its current reported margins
Darden needs to look at the total cash flow profile of the real estate a
OpCo, which will be substantially higher given the REIT tax savings
Darden could sign long-term leases with predictable escalators
Managements Statement Our view
Significant friction costs
Likely loss of investment grade
rating
Reduced access to credit
markets
Sale / leaseback is effectively an
expensive form of secured debt
financing
-
5/19/2018 Darden Real Estate Primer
39/99
V. Bond covenant analysis
-
5/19/2018 Darden Real Estate Primer
40/99
Management has said that Darden would have to pay $300-400 million in Make-Whole Payments1, because a real es
transaction would necessitate refinancing Dardens approximately $2.5 billion in debt.
Management has suggested that these Make-Whole Payments would be required under any potential strategy
realize value for Dardens real estate.
Management has misled shareholders regarding potential debt
breakage costsManagement has not supported its claims that a real estate transaction would involve substantial d
breakage costs.
WE DISAGREE
(1) A Make-Whole Payment is a payment to a bondholder at a price equal to the present value of the remaining interest and
principal payments discounted at a specified rate (usually a U.S. Treasury rate plus a certain number of basis points). This can
occur when a bond covenant amendment might be required to facilitate a corporate action but bondholders do not wish to
consent, and so an indenture allows the issuer the option of paying a Make-Whole Payment to eliminate the bond.
-
5/19/2018 Darden Real Estate Primer
41/99
Management has declined to provide details on why it believes a real estate transaction would necessitate costly Mak
Whole Payments on all of Dardens debt.
It appears to us that management is looking only at the worst case scenario for a poorly-structured sale or spinof all of Dardens real estate under which neither the operating company nor the real estate company would ha
the optimal capital structure.
But doesDarden needto pay off all of the bonds?
We dont think so.
Greg Hessler, Bank of America:Can you highlight just sort of what,specifically, you're seeing in
your bond or your debt covenants that would require you to make whole the capital structure?
Brad Richmond:We think it's fairly clear in there that to the degree that we would need to pay off
those bonds, there are certain provisions that those costs that we would have to incur. So we're fairly
certain that those are there, and those are obligations that we would need to fulfill.
- Q3 Earnings Call, March 21, 2013
Management has misled shareholders regarding potential debt
breakage costs (contd)Management has claimed that a real estate transaction would entail substantial debt breakage cost
but has declined to provide details as to why.
Shareholders and analysts alike have been frustrated by managements unsupported claim
-
5/19/2018 Darden Real Estate Primer
42/99
For example, Covenant Review, the leading independent authority on bond and loan covenants, issued a research rep
dated February 28, 2014 that very clearly states that managements claims may not be accurate.
Therefore, for the benefit of shareholders and the Board, we have put together a brief overview of Dardens key bond
covenants, as well as explanations of what the potential implications are for various transaction scenarios.
We have also laid out some of the arguments as to why managements statements regarding Make-Whole Payments a
misleading.
Management has misled shareholders regarding potential debt
breakage costs (contd)The Companys statements seem to contradict the findings of leading covenant experts who have
examined Dardens bond agreements in detail, as well as the Companys prior statements to
bondholders.
Dardens statements regarding debt breakage costs are highly misleading.
Although in some scenarios it is possible that some bonds might have to be redeemed depending
on what transaction occurs, we think the Company and even agitating shareholders might be
overestimating the likelihood of that occurring.
- Covenant Review, February 28, 2014
-
5/19/2018 Darden Real Estate Primer
43/99
The table below lays out Dardens bonds and the covenants that could impact a real estate transaction.
The key instruments to focus on are the public bonds, which include 6 separate issues that have substantially the sam
covenant package.
An overview of Dardens debt instruments
Darden has approximately $2.5 billion of long term debt.
Most of the theoretical breakage costs would be associated with the public bonds.
Debt Instrument Overview
Principal
Debt Instrument Amount Key Covenants Other Notable Terms
Public Bonds due at $1,900 - Sale / Leaseback - No Asset Sales covenant
various maturities - Mergers - No Transactions with Affiliates covenant
between 2016 and 2037 - Change of Control - No Restricted Payments basket
- No restriction on unsecured borrowing
- No Financial covenants
Private Bonds due 2019 $300 - Asset Sales - No Sale / Leaseback covenant
and 2024 - Transactions with Affiliates
- Mergers
- Debt / Cap
- Change of Control
Source: Company filings
-
5/19/2018 Darden Real Estate Primer
44/99
The table below lays out the key statistics for each of Dardens bonds.
The table above shows the approximate maximum potential payment required to repay each of Dardens bonds, befo
offsetting tax savings
It is important to note that since this is based on a present value calculation, the Make-Whole cost should decl
over time and with every coupon payment; further, it would decline significantly if long-term treasury rates ri
modestly
An overview of Dardens debt instruments (contd)
Dardens debt instruments trade at a wide range of prices and have a variety of Make-Whole price
Despite managements claims, we believe it is unlikely that Darden would need to pay the
Make-Whole Payments for the public bonds in the table above.
Debt Instrument Overview
Principal Market Make-Whole
Debt Instrument Maturity Coupon Amount Price Rate (1) Price(2) Cost(3)
Public Bonds
Senior Unsecured 2/1/2016 7.125% $100 111.3 T + 12.5bp 111.6 $11.6
Senior Unsecured 10/15/2017 6.200% $500 113.8 T + 25bp 116.1 $80.6
Senior Unsecured 10/15/2021 4.500% $400 100.5 T + 40bp 112.0 $47.8
Senior Unsecured 11/1/2022 3.350% $450 89.0 T + 30bp 104.7 $21.2
Senior Unsecured 8/15/2035 6.000% $150 101.6 T + 35bp 133.3 $49.9
Senior Unsecured 10/15/2037 6.800% $300 110.8 T + 35bp 146.5 $139.5
Private Bonds
Senior Unsecured 8/1/2019 3.790% $80 100.1 T + 50bp 106.9 $5.5
Senior Unsecured 8/1/2024 4.520% $220 95.2 T + 50bp 111.6 $25.6
Source: Bloomberg, Company Filings
(1) T = the appropriate Treasury rate for the maturity of each bond(2) Calculated as the present value of the principal and interest payments on $100 of face value discounted at
the Make-Whole Rate, if the bonds w ere repaid today, per Bloomberg
(3) Calculated as the premium to face value if the entire issue is repaid todayat the Make-Whole Price
These
payme
more l
These c
appear hbut the
likeliho
having
them is
-
5/19/2018 Darden Real Estate Primer
45/99
An overview of Dardens key covenants private bonds
The covenants on the private bonds are more restrictive, but the Make-Whole Payments are modes
In a worst case, Darden would be require to make approximately $30 million of Make-Whole
Payments on the private bonds.
Private Bonds - Key Covenant Overview
Covenant Triggering Event Implications Our View
Asset Sales Disposition of >30% of
Consolidated Total
Assets in any 1 fiscal
year in a transaction
that does not also
trigger the Mergers
covenant
Event of Default, most easi ly cured
through repayment of the bonds at a
Make-Whole Amount
- May be difficult to avoid in a outright sale of the entire real estate
portfolio to 1 party in 1 transaction
- Borderline if only the fee simple properties are sold
- Unlikely to be triggered if the real estate is sold over time in
multiple transactions, or if a sale to a single party can be split into
2 transactions that occur in different fiscal years
- Would not be triggered in a REIT spin-off that triggered the
Mergers covenant
- In a worst case, the total Make-Whole Payments on the private
bonds would only be ~$30 million, before offsetting tax savings
Mergers Transfer of Darden's
assets "substantially as
an entirety"
Debt becomes an obligation of the
entity to which assets were
transferred
- There are numerous ways to avoid triggering this covenant
- Even if triggered, the consequences are not necessarily adverse
Change of
Control
50% Ownership and
Continuing Directors
tests
Bonds are puttable at 101% of par - Not relevant to any of the real estate scenarios
- Even if it were triggered, cost is immaterial
Transactions
with Affiliates
Transactions with
affiliates not in the
ordinary course
Event of Default, most easi ly cured
through repayment of the bonds at a
Make-Whole Amount
- Difficult to avoid in a certain REIT spin-off scenarios
- Questionable in a sale, depending on timing / structure
Debt / Cap Maximum Debt / Cap
ratio of 85%
Event of Default, cured through
compliance or repayment of the
bonds
- Unlikely to be triggered if the appropriate amount of debt is left
with the OpCo
Source: Company filings
-
5/19/2018 Darden Real Estate Primer
46/99
Private bonds
In the worst case, it would cost only approximately $30 million to Make-Whole the private bonds.
This cost would be tax-deductible, so the net cost is closer to $20 million.
We dont believe the private bonds will need to be repaid in every scenario
But, for the sake of argument, let us assume the private bonds need to be repaid. Is this a reason not to pursue a re
estate transaction?
The private bonds are not an obstacle to value creation.
Clearly, the private bonds are not an issue.
Now lets focus on the public bonds.
Value Creation Even if Private Bonds are Made Whole
Low High
Potential Real Estate Value Creation (discussed earlier) $1.00 bn - $1.60 bn
Less: Worst case cost to Make-Whole private bonds (1) ($0.02 bn) ($0.02 bn)
Net Value Creation $0.98 bn - $1.58 bn
(1) Net of offsetting tax savings
-
5/19/2018 Darden Real Estate Primer
47/99
The table below lays out the key covenants for Dardens public bonds.
An overview of Dardens key covenants public bonds
The covenants on the public bonds have only limited restrictions, and we believe they would not
prevent a real estate transaction.
As we will demonstrate in more detail, the real estate scenarios we have outlined are unlikely
to trigger Make-Whole Payments on the public bonds.
Public Bonds - Key Covenant Overview
Covenant Triggering Event Implications Our View
Mergers Transfer of Darden's
assets "substantially as
an entirety"
Debt becomes an obligation of the
entity to which assets were
transferred
- There are numerous ways to avoid triggering this covenant
- Even if triggered, the consequences may not be adverse, as the
real estate could support substantial debt and both equity holders
and bondholders may be better off if some or all of the bonds
"travel" with the real estate
Change of
Control
Transfer of Darden's
assets "substantially as
an entirety" t ogether
with a "below
investment grade rating
event"
Bonds are puttable at 101% of par - We believe our plan would improve Darden's credit profile, so a
rating event is unlikely
Sale /
Leaseback
Sale / leasebacks
greater than 10% of
Consolidated Net
Tangible Assets, or
approx. $462m
Proceeds above this amount must be
used to repay long-term debt
generally; i f the public bonds are
repaid in this scenario, the price
would be a Make-Whole Amount that
could be substantially above par
- There are several ways to avoid triggering the Sale / Leaseback
covenant, even in a complete real estate separation, as discussed
in the pages that follow
- Darden would have discretion in choosing which long-term debt
instruments to repay first, given that the make-whole prices vary
substantially between bonds, and new long-term debt that Darden
issues may not have Make-Whole Payments (e.g., the $500 million
outstanding on the '17s would cost $81 million to Make-Whole, but
the $450 million outstanding on the '22s would cost just $21 million)
Source: Company filings
-
5/19/2018 Darden Real Estate Primer
48/99
Public bonds: substantially as an entirety Mergers Covenan
Management has repeatedly told shareholders that any real estate transaction would necessitate costly Make-Whole
Payments on Dardens debt because the real estate constitutes all or substantially all of Dardens assets.
First, a full REIT spin might not in fact constitute a transfer of Dardens assets substantially as an entirety, w
is the technical test.
Second, and more importantly, a transfer of assets substantially as an entirety does not trigger Make-Whol
Payments.
Instead, it triggers the Mergers covenant, which stipulates that the debt will become an obligatio
the spin-off, rather than the parent company.
This simply means that the public bonds would travel with the real estate, which is not necessar
adverse consequence, as the real estate is capable of supporting substantial debt.
As shown in detail in Section VI, at the averageleverage ratio of triple-net lease peers, a Darden R
could support virtually all of the public bonds.
Management appears to be citing the wrong covenants when discussing breakage costs.
Management is either confused regarding Dardens covenants or is misleading shareholder
REIT Debt Capacity
Darden REIT EBITDA(1) $281
REIT Peer Average Leverage 6.4x
Debt Capacity $1,798
(1) Midpoint of our estimated range
Compares to $1.9bn
outstanding public bonds
-
5/19/2018 Darden Real Estate Primer
49/99
Even if management argues that the Companys real estate does in fact constitute Dardens assets substantially as an
entirety, a real estate separation would not necessarily cause a violation of the Mergers covenant.
For example, rather than spinning off the REIT, the OpCo could be spun off instead.
Alternatively, the Company could create a REIT spin-off that holds mostbut not allof the real estate asse
Again, it is important to note that the consequences of triggering the Mergers covenant is not a Make-Whole Paymen
merely that the debt will travel with the spin-off assets that constitute substantially as an entirety.
Public bonds: substantially as an entirety Mergers Covenan
We do not believe that the Mergers covenant in either the public or private bonds is a mater
concern for shareholders.
The independent Covenant Review report provides convincing support for our position on the
Mergers covenant.
-
5/19/2018 Darden Real Estate Primer
50/99
Public bonds: substantially as an entirety Mergers Covenan
As demonstrated earlier, if the Mergers covenant is triggered, the cost is minimal.
There are no Make-Wholes in this scenario.
The REIT could support all of the public bonds.
The Mergers and Change of Control covenants are not obstacles to value creation.
Clearly the Mergers covenant is not an issue.
Now lets focus on the Change of Control covenant.
Value Creation Even if Private Bonds Made Whole and Mergers Triggered on Public Bonds
Low High
Potential Real Estate Value Creation (discussed earlier) $1.00 bn - $1.60 bn
Less: Worst case cost to Make-Whole private bonds (1) ($0.02 bn) ($0.02 bn)
Less: Cost if debt "travels" with spin per Mergers covenant $0.00 bn $0.00 bn
Net Value Creation $0.98 bn - $1.58 bn
(1) Net of offsetting tax savings
-
5/19/2018 Darden Real Estate Primer
51/99
Public bonds: substantially as an entirety Change of Control
Further, management has also supposedly told certain shareholders and analysts that a real estate transaction would tr
change of control payments.
This argument again assumes that a full REIT spin would be a transfer of all or substantially all of the proper
or assets of the Company.
It also assumes that a below investment grade rating event would happen, which we also do not believ
would happen in a well-structured transaction.
And a Change of Control Triggering Event, if it were to occur, would not trigger Make-Whole Payments
would instead require Darden to offer to redeem the notes at 101% of par, which would cost only approximate
$19 million above face value if all of the bonds were put.
Since many of the bonds currently trade above 101%, it is unlikely that all of them would put at 101%.
Even if they did, this is not necessarily an adverse consequence, as we believe that, post-separation, both the REIT an
OpCo could refinance at attractive rates.
Management appears to be citing the wrong covenants when discussing breakage costs (contd).
Management is either confused regarding Dardens covenants or is misleading shareholders.
Illustrative Cost of Debt
Current Real Estate Separation
Darden(1) OpCo(2) REIT(2)
Debt $2,551 $1,262 $1,288
Weighted Avg. Int . Rate 5.2% 3.1% 4.3%
Interest Payments $133 $39 $55
Annual Interest Savings $38
Interest Rate Reduction 150bp
Source: Bloomberg, CapitalIQ, Company Fili ngs
(1) Based on LTM reported numbers
(2) In order to be conserv ative, interest rates are assumed to be 20% higher than Brinker and NNN, respectively
For example, in Section VI we outline
several potential capital structures for the
REIT and OpCo and demonstrate that in
conservative cases Darden could save tens
of millions of dollars annually in interest
expense, easily repaying the $19 million in
Change of Control costs in year 1.
-
5/19/2018 Darden Real Estate Primer
52/99
Public bonds: substantially as an entirety Change of Control
As a reminder, a Change of Control put requires both a transfer of Dardens assets substantially as an entirety and
below investment grade rating event we dont think eitherof these is likely
But, for the sake of argument, let us assume a Change of Control event is triggered. Is this a reason not to pursue
estate transaction?
Worst case the bonds are put at 101%, but:
We dont believe all of the bonds would put at 101%, since many of them trade above 101% and with the rig
capital structure would continue to do so.
Even if it is an issue, the cost is just $19 million, before offsetting tax savings.
We would view puts at 101% as an opportunity to refinance both the REIT and the OpCo at attractive rates.
The Mergers and Change of Control covenants are not obstacles to value creation.
Clearly the substantially as an entirety test for either the Mergers or the Change of Contr
covenants is not an issue.
Now lets focus on the Sale / Leaseback covenant.
Value Creation Even if Private Bonds are Made Whole and Public Bonds are put at 101%
Low High
Potential Real Estate Value Creation (discussed earlier) $1.00 bn - $1.60 bn
Less: Worst case cost to Make-Whole private bonds(1)
($0.02 bn) ($0.02 bn)Less: Worst case cost to repay public bonds @ 101% (1) ($0.01 bn) ($0.01 bn)
Net Value Creation $0.97 bn - $1.57 bn
(1) Net of offsetting tax savings
-
5/19/2018 Darden Real Estate Primer
53/99
Management is on record as stating that its bond covenants do not apply to subsidiaries that are not structured as
corporationssuch as trustsand therefore according to Darden itself any real estate that is in Dardens existing int
REIT or a new REIT subsidiary created by Darden would not be subject to any of the restrictive covenants.
We believe that a substantial portion of Dardens real estate is already in subsidiaries that are structured as trusts
Further, the definition of an Unrestricted Subsidiary includes any subsidiary the principal business of which con
of the owning, leasing, dealing in or development of realproperty.
Management expressed this view as recently as
October 2012 in the Companys finalprospectus
supplement for its Senior Notes due 2022 (public
bonds).
Covenant Review found that there is no apparent
limit on contributing assets to a subsidiary that
would be an Unrestricted Subsidiary.
Public bondsSale / Leaseback covenant
Managements current stance contradicts their prior written statements to bondholders.
Darden could easily avoid the Sale / Leaseback covenant.
Management has either forgotten about its prior written statements or is
misleading shareholders.
These covenants apply to Darden and to certain of
subsidiaries but do not apply to Dardens subsidiar
that are not corporations.
- Final Prospectus Supplement to Darden Restaurants,
3.350% Senior Notes due 2022, October 1, 2012
Accordingly, Darden can contribute its real es
assets to a new subsidiary and designate that
subsidiary as an Unrestricted Subsidiary. That
Unrestricted Subsidiary could then sell and lea
back its real estate portfolio, without having to
repay debt.
- Covenant Review, February 28, 2014
-
5/19/2018 Darden Real Estate Primer
54/99
Public bondsSale / Leaseback covenant
First, as discussed earlier, according to managements own written interpretation, the covenants do not applyto
subsidiaries that are structured as trusts (and trusts currently hold real estate or real estate could be contributed to trus
Second, they do not applyto subsidiaries the principal business of which consists of the owning, leasing, dealing indevelopment of realproperty, one would think a REIT fits this definition.
Third, even if the covenants are deemed to apply to all of Dardens subsidiaries, Darden could also avoid the Sale /
Leaseback covenant by converting the parent company into a REIT and spinning the OpCooff to shareholders
This should avoid triggering the covenant, because Darden as the REIT will not have sold or transferred any
their properties, and there is no restriction on leasing those properties.
In addition, even if the REIT is spun off rather than the OpCo and the covenants are deemed to apply to the subsidiar
that hold real estate, this may not constitute a sale-leaseback, as there may be no sale transaction.
The are multiple avenues to avoid the Sale / Leaseback covenant.
There are multiple avenues to avoid triggering Make-Whole Payments.
Darden
OpCo REIT
DRI shareholders
Tax-
free
Spin-
off
Darden
OpCo REIT
DRI shareholders
Tax-
free
Spin-
off
Structure A Structure B
-
5/19/2018 Darden Real Estate Primer
55/99
Public bondsSale / Leaseback covenant
In a worst case, the headline cost to Make-Whole allof the public bonds is approximately $350.
Net of offsetting tax savings, the cost would really be approximately $230 million.
As discussed above, we do not believe it is likely that the Sale / Leaseback covenant would be triggered
But, for the sake of argument, let us assume it is triggered. Is this a reason not to pursue a real estate transaction?
First, as discussed on slide 47, Darden can do approximately $460 million of sale / leasebacks before the
requirement to repay debt even kicks in, and even then Darden has significant flexibility in choosing what deb
instruments to repay, including, potentially, new long-term debt that does not have expensive Make-Wholes.
Therefore it is really only in the case of a near-term sale of virtually the entire portfolio that one might ex
Darden to Make-Whole allof the public bonds.
Second, as discussed earlier, refinancing all of the bonds would be an opportunity for Darden to save tens of
millions of dollars in annual interest expense, potentially more than offsetting the Make-Whole costs on a pres
value basis.
We do not believe the Sale / Leaseback covenant is an obstacle to value creation.
Even in a worst case, we believe a real estate separation still makes sense
But, we believe the worst case can easily be avoided.
Value Creation Even if Private BondsandPublic Bonds are Made Whole
Low High
Potential Real Estate Value Creation (discussed earlier) $1.00 bn - $1.60 bn
Less: Worst case cost to Make-Whole private bonds (1) ($0.02 bn) ($0.02 bn)
Less: Worst case cost to Make-Whole public bonds (1) ($0.23 bn) ($0.23 bn)
Net Value Creation $0.75 bn - $1.35 bn
(1) Net of offsetting tax s avings
-
5/19/2018 Darden Real Estate Primer
56/99
Apart from the question of Make-Whole payments, management has tried to argue against a real estate separation by
telling shareholders that Darden would face a higher pro forma cost of debt following a REIT spin-off.
We believe this is unlikely, if properly structured.
Management appears to be assuming that the REIT is spun off and capitalized entirely with equity, while the O
is left to shoulder the entire debt burdenwe have not proposed this structure, nor, to our knowledge, has any
else.
In fact, most REITs support substantial leverage and pay lower rates than similarly-capitalized operating
companies.
Between the additional cash flow available through the REIT structure and the ability of REITs to support
meaningful leverage, we believe that following a well-structured spin-off there is no reason the OpCo could n
remain investment grade and that the blended cost of debt of the two companies would be lower than Darden
current cost of debt.
On a present value basis, this lower cost of debt could more than offset the cost of Make-Whole Paymen
the unlikely event that they were required; certainly, the cost of Make-Wholes on the private bonds could
recouped in year 1.
Illustrative Cost of Debt
Current Real Estate Separation
Darden(1) OpCo(2) REIT(2) Blended
Debt $2,551 $1,262 $1,288 $2,551
Weighted Avg. Int . Rate 5.2% 3.1% 4.3% 3.7%
Interest Payments $133 $39 $55 $95
Annual Interest Savings $38
Interest Rate Reduction 150bp
Source: Bloomberg, CapitalIQ, Company Filings
(1) Based on LTM reported numbers
(2) In order to be conservative, interest rates are assumed to be 20% higher than Brinker and NNN, respectively
Refinancing Costs
We do not believe that a real estate separation would negatively impact Dardens cost of debt.
A REIT spin off should enhance, rather than impair, Dardens credit profile.
See detailed structur
analysis in Section V
an explanation of ea
these assumptions.
-
5/19/2018 Darden Real Estate Primer
57/99
These alternatives should result in the Company accomplishing its business objectives with minimal cost, whil
improving the credit profile of bondholders investments.
Conclusion
While there are several options to structure a value enhancing real estate transaction with minimal
debt breakage costs, we believe that intelligent alternatives are available to provide both bondholde
and equity holders with mutually beneficial options.
We believe a real estate transaction could benefit both equity holders and bondholders.
-
5/19/2018 Darden Real Estate Primer
58/99
VI. Transaction scenarios
-
5/19/2018 Darden Real Estate Primer
59/99
Outright Sale
The real estate could be sold in one transaction, or spread over time to ensure the best buyer is found for
property.
This option is simple and could be executed quickly, but it could generate significant tax leakage (howev
there are buyers that would pay a premium price for the portfolio or certain properties, this could still cr
substantial value, net of taxes).
REIT Spin-off (could be structured as a REIT or an OpCo spin-off)
This would be more complicated than a sale, but it would be tax-free, so even if the REIT trades at a dis
other public triple-net REITs, it would still create substantial value for Darden shareholders.
A REIT could include all of Dardens owned real estate, only the Fee Simple properties, or some combin
Tax-efficient Sale or Merger
Darden could merge its real estate with a publicly-traded or private REIT, with the interest ultimately sp
to shareholders.
There are a number of ways to accomplish this on a tax-free basis.
We believe there are REITs interested in discussing such a transaction with Darden.
Darden shareholders would get immediate diversification and an established REIT management team.
In each of these scenarios, we believe there are ways to structure a transaction with minimal-to-no debt breakag
as explained in Section V.
In order to further clarify this point for shareholders, we have included sample transaction structures for
business scenario.
Value creation scenarios
We believe there are a number of highly attractive alternatives to realize value from Dardens real
estate.
There are several attractive alternatives to create substantial value for shareholders.
1
2
3
-
5/19/2018 Darden Real Estate Primer
60/99
Scenario 1: Outright Sale
The simplest option for Darden would be an outright sale of the entire real estate portfolio, either t
one buyer or many.
An outright sale is simple and creates value, but may not yield the highest ultimate value for
shareholders.
However, sales of certain properties combined with another option for the bulk of the portfolio cou
maximize value.
The real estate could be sold in one transaction, or spread over time to ensure the best buyer is found for each proper
Certain buyers will pay a premium for premium locations, while others are primarily focused on fixer-uppers
need of repositioning / redevelopment that a premium buyer may not want.
Certain publicly traded REITs will not be interested in the Ground Leased portion of the portfolio, but there ar
other buyers for those assets.
Many properties could be sold for higher prices, over time, in the 1031 like kind exchange market.
Darden could reduce the present value of tax payments by focusing first on properties with a higher tax basis.
This strategy could generate sizable tax leakage; however, it should be fully explored, along with other alternatives, a
there may be buyers willing to pay a premium price for the entire portfolio.
There will almost certainly be buyers willing to pay a premium for certain pieces.
It should be relatively easy to execute, given that the markets for $2-4 million properties and for portfolios of several hundred million dollars are both very liquid.
-
5/19/2018 Darden Real Estate Primer
61/99
Darden sells the real estate to 1 buyer in 1transaction for cash
Likely to trip Asset Sales covenant on
the private bonds if ALL of the real
estate is included
Borderline if only the Fee Simple real
estate is included
Potential Make-Whole Payments on theprivate bonds are $30 million
Numerous avenues to avoid Sale /
Leaseback covenant
Scenario 1: Outright Sale (contd)
There are several ways to structure outright sales to minimize friction costs.
There is significant flexibility in structuring asset sales to avoid tripping covenants.
Outright Sale to 1 Party
Darden BuyerCash
Real Estate
Multiple Sale Transactions
Darden sells the real estate in multiple transactions over time
Would not trip Asset Sales covenant if sales occur in differe
years
Could trip Transactions with Affiliates covenant if leases are
before properties are transferred ($30 million potential Make
DardenBuyer A
Cash
Real Estate
Buyer B1
Completed
of FY 1
Compl